REPORT: China has started a crackdown on its shadow banking sector

REUTERS/Claro Cortes Anyone thinking about setting up an internet-based finance company in China has just suffered a setback. According to a report from Bloomberg, citing Chinese magazine Caixin, authorities have just initiated a year-long crackdown on the sector.

As part of the tougher approach, new applicants with finance-related names or businesses can no longer simply register with local offices of the State Administration for Industry & Commerce, requiring firms instead to first obtain approval from financial regulators.

Caixin states that the measures — begun on April 14 and slated to last one year — have already been implemented in major financial centres such as Shanghai, Shenzhen and the nation's capital, Beijing.

The new rules are expected to cover firms including exchanges, fund managers, private equity, online finance, peer-to-peer lending, crowdfunding, internet insurance and payments, said the magazine.

It also stated that the government will revoke licenses for existing finance firms that fail to pass inspections during the crackdown period.

China's flourishing shadow banking sector — predominantly where these firms operate — has contributed to rapid asset price inflation in China both in stocks and the nation's property market in recent years.

In a note released earlier this year, HSBC's China research team suggested that rapid house price growth in the Chinese cities of Shenzhen and Shanghai was being fuelled by shadow banking firms.

"The credit growth has fed into rising asset inflation, notably in property prices and especially those of first tier cities," says HSBC. "Following Shenzhen's lead from last year, Shanghai's residential property prices rose 24% during the first two months of the year. There are signs that speculative forces are at play, aided by the credit boom, a flourishing shadow banking sector and P2P (person-to-person) financing."

In late 2015 China's banking regulator, the CBRC, announced tougher restrictions on thousands of online peer-to-peer (P2P) lenders operating in the country, stating firms would not be allowed to take deposits from the public, pool investors money or guarantee returns.